Golden Star Resources

Golden Star Resources Ltd (TSX: GSC) is a gold mining company which owns and operates the Wassa underground mine in Ghana, West Africa. The mine has mineral proven and probable mineral reserves of approximately 1.5 million ounces (oz).

Why Should Investors Book Profit?

• Lower margin profile v/s Industry Median: In Q3FY21, the company’s reported margin was significantly below the industry median, with gross margin stood at 30.3% vs industry median of 50.2%, EBITDA margin of 9.8% vs industry median of 41% and reported a negative Net margin of 17.1% vs industry median of positive margin of 12.5%, respectively. Moreover, the company’s margin profile declined on a sequential quarter basis as well.

• Weak liquidity profile: The company has relatively poor liquidity profile against the industry median, with current ratio of 1.44x as of September 30, 2021, vs industry median of 2.57x. And quick ratio of 0.95x vs industry median of 1.51x, respectively.

• Higher balance sheet risk: The company’s debt to equity ratio at the end of September 2021 stood at 17.94x, which is too high against the industry median of 0.21x. Additionally, its % LT Debt to Total Capital stood at 76.8% against the industry median of 11.3%. These factors implies a higher balance sheet risks associated with the company.

• Exhausted technical indicators: Recently, the stock witnessed a healthy rally on the daily price chart and has formed the rounding top pattern where the price could face resistance at horizontal trendline. Also, the momentum oscillator RSI (14-Period) is trading at ~83.81 levels, indicating that the stock is hovering into an overbought and potentially due for a price correction.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): EV to EBITDA-based valuation 

Stock recommendation

The company's sales declined 13% to USD 64.3 million in Q3 2021 and incurred a net loss of USD 0.2 million as a result of reduced revenue and higher other expenses. The free cash flow has also decreased to USD 1 million in the reported period, compared to USD 13.4 million in the prior period. Moreover, the company is exposed to a higher balance sheet risk given the significantly higher debt/equity ratio. Hence, based on the above rationales and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 4.65 on November 12, 2021.

1-Year Price Chart (as on November 12, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

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